Accuray (ARAY) has really never enjoyed smooth sailing. Not only has the company sought to break into the radiation oncology space (at the expense of strong incumbents Varian (VAR) and Elekta (OTCPK:EKTAY), but it has done so at a time when hospital capital budgets are already under a great deal of strain. More recently, the company executed a controversial acquisition of TomoTherapy, and while the company has made good progress on margin improvements, order growth has been elusive.
Now the company has announced that its CEO Euan Thomson has resigned. Apparently this wasn't a sudden development, as the board has already named a replacement - Josh Levine, formerly of Mentor (now part of Johnson & Johnson (JNJ)) and Immucor. While I see ample scope for Levine to improve performance at Accuray, it's not hard to wonder if this move telegraphs anything about the next earnings release and/or whether it will disrupt much-anticipated launches at the upcoming ASTRO meeting.
Leaving A Mixed Legacy
When the CEO of a major company leaves, it doesn't usually take long for scuttlebutt to fill in the blanks as to why the transition happened. With a company of Accuray's size, that isn't as likely to be the case, but it's not hard to make a few broad guesses.
For starters, Thomson did lead this company from virtually no revenue a decade ago to $50 million in sales in 2006 and over $400 million for the 2012 fiscal year. He also oversaw an acquisition (TomoTherapy) that considerably broadened the company's product offerings, and then led a very impressive effort to improve the service margins of Tomo.
On the other hand, the company is still barely a player in the market and the company's share of new placements has been shrinking, despite the exit of Siemens (SI) from the market. What's more, the acquisition of Tomo was hardly a universally loved decision, and the stock still hasn't recovered to pre-deal levels. Last and not least, disclosure has worsened since the Tomo deal, and there are growing worries that the slow acceptance of CyberKnife will let Varian and Elekta close the gap before it makes much of an impression on the market.
Big Swings Or Small Improvements?
Now the questions turn to what Levine will do differently as the CEO. Given his tenure at Mentor and Immucor, he definitely comes into the job with credibility and a proven ability to run sizable (and profitable) medical technology firms.
Levine's tenure at Mentor was not spotless. While the company held its own against Allergan (AGN), the controversies over silicone gel breast implants and some issues with the FDA (over both breast implants and a dermal filler) created some definite challenges for the stock. Mentor ultimately did get a buyout bid from J&J, but at a price well below prior peak levels.
So what's on tap for Accuray? I wouldn't be surprised if near-term product/promotion strategies do not change much, as the company has some major announcements queued up for the ASTRO meetings at the end of this month. Likewise, the ongoing margin improvement efforts at Tomo have paid real dividends.
Accuray has the resources to invest in additional clinical studies, but those take time and don't help near-term sales trends. Consequently, that may lead Levine to look to put more resources into marketing - delaying the return to profitability, but improving the order growth rates that have weighed on sentiment.
Longer term, it wouldn't surprise me if there's a thorough re-evaluation of TomoTherapy and whether that business merits ongoing investment - it wasn't Levine's decision to acquire it, and if he doesn't believe in its potential it may be de-emphasized in favor of heavier support to CyberKnife. While this is probably pretty far-fetched at this point, going back to more of a pure-play on CyberKnife could conceivably make Accuray a buyout candidate again.
The Bottom Line
I still have cautious optimism about Accuray's potential. I do believe the addition of a multi-leaf collimator to CyberKnife (standard on Varian and Elekta systems) could do a lot to improve speed and flexibility. Likewise, software upgrades to Tomo systems could improve their treatment times as well. These are relevant (potential) improvements, given that both of Accuray's systems are slower than rival systems and "time is money" even in radiotherapy.
I do not wish to bury now-former CEO Thomson; he did a reasonable job bringing the company to this point, and now the company may be in position to benefit from different leadership and a different go-to-market/sales strategy. While there may be some risk that this announcement is tied to a disappointing September quarter, the longer-term reality is that Accuray has a shrinking window of opportunity to really make a mark in the market.
At this point, these shares look like a pretty binary trade - if you believe in the underlying quality of Accuray's technology and that it simply needs a better sales/marketing strategy, there's ongoing reasons to be optimistic and potential fair value could still lie in the double-digits. If, on the other hand, you believe Accuray will never gain a foothold against Varian or Elekta (or attract a buyout bid), there's no reason to own the shares. I am still willing to bet on the former outcome, so I will continue to hold these shares for the time being.